Question

9. Assume a company requires 10% (after-tax) ROI from its investment. The company has defined investment as total assets. Further, assume that the company has Br 500,000 assets, produces 2,000 units of output, and Br 100, 0000 variable and fixed costs. The tax rate is 50%. The sales price will be

Answer 1

The company's sales price will be Br 100 with its 10% after-tax ROI.

Data and Calculations:

Required after-tax Return on Investment (ROI) = 10%

Required post-tax Return on Investment (ROI) = 20% (10%/(1 - 50%))

Tax rate = 50%

Total assets = Br 500,000

Production output = 2,000 units

Variable and Fixed Costs = Br 100,000

The post-tax Return on Investment = Br 100,000 (Br 500,000 x 20%)

The Sales value = (Total costs + Post-tax ROI)

= Br 200,000 (Br 100,000 + Br 100,000)

The selling price per unit = Br 100 (Br 200,000/2,000).

Thus, the company's sales price per unit is Br 100.

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